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LO.5: Why should company management focus on long-run performance?
F. Differences in Perspectives
1. Financial measures are lagging indicators, or reflections of the results of past decisions.
indicators reflect effects or outcomes.
4. Managing for the long run has commonly been viewed as managing a series of short runs.
Although appealing, this approach fails when the firm does not keep pace with long-range
technical and competitive improvement trends.
a. Thinking only of short-run performance and ignoring the time required to make long-term
b. Short-run objectives generally reflect a focus on the effective and efficient management of
c. A firm’s long-term objectives generally involve resource investments and proactive efforts to
d. Because competitive position results from the interaction of a variety of factors, a firm must
e. The true drivers of increased market share for a firm are likely to be product and service
LO.6: What factors should managers consider when selecting nonfinancial performance
measures?
G. Nonfinancial Performance Measures
qualitative measures are often subjective.
2. Managers are usually more comfortable with and respond better to quantitative measures of
3. Selection of Nonfinancial Measures
a. Nonfinancial performance measures (NFPMs) are based on nonmonetary details, such as
time (e.g., manufacturing cycle time or setup time), quantities (e.g., number of patents
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publicly accessible website, in whole or in part.
b. Appropriate nonfinancial metrics are those that can be clearly articulated and defined, are
c. As indicated in text Exhibit 14.10 (p. 564), NFPMs have many distinct advantages over
d. Using a very large number of NFPMs is counterproductive and wasteful. Additionally, there
e. An organization must determine which factors are essential to long-term success and
develop short-run and long-run metrics for these areas to steer the company toward success.
f. A short-run measure of success for quality is the number of customer complaints in the
for quality improvements of company products.
i. Choosing appropriate performance measures can also help a company focus on the
g. Three nonfinancial performance measures are throughput, cost of quality, and lead time.
i. Throughput
should not be viewed as throughput.
Throughput = Manufacturing Cycle Efficiency x Process Productivity x Process
Quality Yield
Manufacturing cycle efficiency is the proportion of value-added processing time to
total processing time.
added processing time.
Process quality yield is the proportion of good units resulting from activities.
A example of these calculations is given in text Exhibit 14.11 (p. 565).
Management should strive to increase throughput by decreasing non-value-added
activities, increasing total unit production and sales, decreasing the per-unit
ii. Cost of Quality
Companies operating in the global environment are also generally concerned with
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publicly accessible website, in whole or in part.
As quality improves, management’s threshold of acceptable performance becomes
more demanding and performance is evaluated against progressively more rigorous
benchmarks.
iii. Lead Time
Lead time refers to how quickly customers receive their goods after placing their
orders.
Measuring lead time should cause products to be available to customers more
rapidly.
processing delays.
iv. Carbon Footprint
Carbon footprint refers to all of the greenhouse gas emissions created by an
organization’s activities during a specified time.
nearly 3,000 companies in 60 countries.
4. Establishment of Comparison Bases
internally or determined from external sources.
b. A general model for measuring the relative success of an activity compares a numerator
outcome volume.
5. Use of Multiple Measures
a. A performance measurement system should encompass a variety of measures, especially
publicly accessible website, in whole or in part.
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5. Balanced Scorecards (BSC) may be used in organizations at multiple levels: top management,
subunit, and even individual employees.
will ultimately provide the organizational results desired.
b. Taken together, the measures provide a holistic view of what is happening both inside and
6. A clear and growing trend in performance measurement is accounting for environmental impact
and sustainability of operations. Text Exhibit 14.15 (p. 571) represents what a BSC may look like
with the inclusion of a fifth perspective addressing environmental and sustainability.
7. No single BSC, measurement system, or set of performance measurements is appropriate for all
operations may require some additional considerations in performance measurement and
evaluation compared to domestic operations.
I. Performance Evaluation in Multinational Settings
3. Income comparisons between multinational units could be invalid because of differences in trade
4. Firms with multinational profit or investment centers need to establish flexible systems of
5. Regardless of location, performance measures must be linked to the organization’s mission and
LO.9: What is compensation strategy, and what factors must be considered in designing the
compensation strategy?
J. Compensation Strategy
publicly accessible website, in whole or in part.
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6. The balancing of incentives provided for both groups and individuals is also an important
consideration in designing employee incentives.
a. Workers in automated production systems function more by indirectly monitoring and
controlling machinery and are therefore less directly involved in hands-on production.
d. Eventually, some workers could decide to take a “free ride” on the group because they
perceive their proportional shares of the group reward to be insufficient to compensate for
their efforts.
L. Links Between Performance Measures and Rewards
1. General
compensation strategy are known.
b. Performance measures should link, directly or indirectly, the basic business strategies with
individual actions.
c. Rewards in a performance-based compensation plan should be based on monetary and
nonmonetary, short-term and long-term measures.
2. Degree of Control over Performance Output
efforts need to be made to identify performance measures that minimize the risk that is borne
by the workers and are associated with noncontrollable factors.
d. At the worker level, performance measures should be specific and typically have a short-run
focus – usually on cost and/or quality control.
3. Incentives Relative to Organization Level